Apple (AAPL) Q3 FY 2021 Earnings Preview: Expect $1.01 EPS and Robust Growth – July 2021 Update

Keep a close eye on Apple's expanding services revenue segment in this quarter's report.

Highlights to Watch

• Analysts project earnings per share (EPS) of $1.01, up from $0.65 in Q3 FY 2020.
• Services revenue is anticipated to grow steadily year-over-year.
• Overall revenue is forecasted to increase strongly despite ongoing antitrust scrutiny.

Apple Inc. (AAPL) has experienced remarkable earnings and revenue growth recently, driven largely by its thriving services division. However, proposed legislation in the U.S. Congress threatens to loosen Apple's control over app installations on iPhones, potentially impacting this key revenue stream. Additionally, Apple faces regulatory challenges in Europe concerning its in-app payment policies for rival music streaming services, which could affect future earnings.

Investors will be closely analyzing Apple's Q3 FY 2021 earnings report, releasing after market close on July 27, 2021, to assess both current financial health and the potential long-term effects of regulatory pressures. The fiscal year 2020 ended on September 26, 2020, and while analysts expect continued strong EPS and revenue growth, the pace may moderate compared to previous quarters.

Another critical focus is Apple's services revenue, which includes digital content platforms like the App Store, Apple Music, Apple Arcade, Apple News+, and Apple TV+, alongside services such as AppleCare, advertising, cloud services, Apple Card, and Apple Pay. This segment offers higher profit margins than hardware sales, making it a strategic growth area as Apple diversifies its revenue streams.

Over the last year, Apple's stock has outperformed the broader market, delivering a total return of 50.9%, significantly surpassing the S&P 500's 33.8% return. Despite some volatility, the stock reached new highs earlier in July 2021, reflecting strong investor confidence.

Apple’s Earnings Track Record

In Q2 FY 2021, Apple surpassed expectations with EPS growth of 118.6% and revenue growth of 53.6% year-over-year, marking the fastest growth in over 15 quarters. Following this strong performance, Apple increased its dividend by 7% and expanded its share buyback program by $90 billion.

Despite beating estimates in Q1 FY 2021 with EPS up 34.6% and revenue rising 21.4%, Apple's stock dipped briefly due to market volatility. Notably, international sales accounted for approximately 64% of total revenue, underscoring Apple's global market strength.

For Q3 FY 2021, analysts forecast EPS growth of 55.7% and revenue growth of 23.2%. Meeting these targets would position Apple for its fastest annual EPS and revenue growth in at least five years. Full-year FY 2021 projections estimate EPS growth of 58.4% and revenue expansion of 29.7%.

Source: Visible Alpha

Focus on Services Revenue

Apple's services segment, encompassing digital content stores and streaming services, has been a key growth driver since 2015, when iPhone sales began to plateau. Services deliver substantially higher profit margins compared to hardware, amplifying Apple's profitability with each additional dollar earned.

However, Apple faces regulatory and legal challenges that could impact this revenue stream. Proposed antitrust legislation and lawsuits, such as the one from Epic Games, challenge Apple's control over app distribution and payment systems. Potential changes could reduce Apple's services revenue and profit margins.

Despite these challenges, Apple’s services revenue has shown healthy growth, with annual increases of 34.3% in FY 2017, slowing to 16.2% by FY 2020. Growth accelerated again in FY 2021, with services revenue rising 24.0% in Q1 and 26.6% in Q2. Analysts expect a 24.0% increase in Q3 FY 2021, with full-year growth projected at 23.4%—the fastest pace since FY 2017.

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